No matter how tight the local budget or fraught the national fiscal politics, spending on public safety is gaining. In 2012, 44% of municipalities hiked expenditures on public safety, outstripping spending on infrastructure and education, according to the National League of Cities. "They're closing fire stations and police precincts, but spending on public-safety systems has been rising," says Terry Hall, who runs the York-Poquson-Williamsburg 911 Center in Virginia and presides over the Association for Public Safety Communications Officials.

Even budget-conscious towns and cities are spending more to upgrade their communications gear.
Motorola Solutions

This priority helped Motorola's government-segment revenues jump 12%, to $1.5 billion, in the third quarter, and its operating margin to hit 20.4%. Government business is expected to push Motorola revenues to $8.7 billion in 2012, up from $8.2 billion in 2011, while the company's other key group, commercial radio, is being revamped.

Much of two-way-radio growth is reflected in the stock, which has gained by a quarter from its July low to $54.88, giving it a market value of $15.4 billion. The shares now trade at 17.5 times forward earnings, versus 13 for the overall market, and yield 1.9%, modestly below market rate.

Although that may make the shares seem a little overstretched, they actually have plenty of remaining power. Demand for Motorola's safety devices is expected to remain strong, while the company's solid cash flows and underused balance sheet offer the possibility of delivering more capital to shareholders via dividends and stock buybacks. That also will provide money for acquisitions and fixes for its commercial-radio unit. Kulbinder Garcha of Credit Suisse has a $62 target for the stock, about 15% above last week's level. Depending on how aggressive Motorola is with its balance sheet, the upside could be $10 or more above that.

Why will public-safety radio continue to grow? Most systems are 15 to 20 years old and must be upgraded to new digital services to help first responders do their jobs more effectively. Motorola provides the new systems, which are faster and offer more features, and can connect to existing analog devices. Among the more popular items these days is a special system that keeps track of first responders, so they don't clog an area in a time-critical situation. Hall notes that his Motorola digital 911 service in Virginia stayed on even as cellphone networks went off during 2011's freak local earthquake.

"We're having a record year in public safety, the best year we've had," says CEO Greg Brown, a Motorola veteran who oversaw the split-up of the company's enterprise mobility and consumer units two years ago (the latter was purchased by Google this year), when the whole company was brought low by weak cellphone sales.

Brown says 2013 growth in public safety may not match the double-digit gains of 2012, but "it will be unusually solid." The concluding year had an advantage: Municipalities had to meet new rules requiring more efficient radio-spectrum use. Still, many towns got waivers to switch in 2013, and the much-delayed creation of a national communications network for safety should resume. Both will help revenues.

PUBLIC SAFETY KICKS IN two-thirds of Motorola's revenues. The rest comes from commercial radios used in trucks, and from mobile communication and security devices in big industrial space and other areas. Weak global growth and Motorola's deliberate phaseout of some outdated product architecture have hurt sales.

Outside of government sales, Motorola is venturing into new markets for commercial radio, including warehousing, refrigeration, and ports. Like the public-safety market, enterprise radio is still mostly analog. Motorola estimates that just 10% of the base of professional and commercial radios is digital.

Brown believes such opportunities will boost overall sales by 5% to 8% in coming years. Analysts on average think earnings will grow about 15%.

Margins are rising; they probably clocked in at 17% for 2012, one percentage point higher than last year. Brown has designated a quarter of Motorola's $1 billion in operating-cash flow for capital spending, 30% for dividends, and 45% for either share repurchases or acquisitions.

Motorola could repurchase even more shares. Since summer 2011, it has bought back $3.2 billion of stock, including a chunk held by activist investor Carl Icahn. One way to buy more would be to add debt. Right now, the company has $1.7 billion in net cash. Although it must contend with pension liabilities, "there's plenty of opportunity for us to do a return of capital to shareholders and surgical mergers and acquisitions," says Brown.

The Bottom Line

Motorola Solutions' stock could move from about $54 to north of $62 based on its recent growth rate and flexible balance sheet.

He has vowed to get the company into a net debt position, but won't say how far. Garcha of Credit Suisse thinks net debt of $1.5 billion is possible and that as much as $7.5 billion in dividends and buybacks could occur between 2012 and 2015. That comes to about half Motorola's existing market value. All other things being equal, that, in theory at least, would boost last week's stock price above $75.

There's more. ValueAct, a well-regarded firm led by activist investor Jeff Ubben, recently doubled its position to 10% of Motorola's shares outstanding. ValueAct partner Brad Singer sits on Motorola's board. Singer didn't return our calls, but his firm's stake and his position pretty clearly communicate that more shareholder-friendly policies are about to arrive at Motorola Solutions.